Director Salary: Tax Efficient Payment Method Explained

At Towerstone Accountants we provide specialist limited company accountancy services for directors and owner managed businesses across the UK. We wrote these guides for people running a company who want clear answers on tax, payroll, Companies House duties, and day to day compliance without jargon. Our aim is to help you understand your responsibilities, reduce the risk of penalties, and know when to get professional support.

A private limited liability company is one of the most common and widely used business structures in the UK. I work with private limited companies every day from new start ups to long established owner managed businesses and while many people run them very few truly understand what the structure means in practice. That lack of understanding often leads to confusion around tax responsibility risk and personal exposure.

In this article I want to explain clearly what a private limited liability company is how it works why people choose it and what the advantages and disadvantages really are. I am writing this in the first person based on how I explain the concept to my own clients and everything here reflects real UK practice and guidance from HM Revenue and Customs Companies House and GOV.UK.

What a private limited liability company actually is

A private limited liability company often shortened to limited company or Ltd is a business structure that exists as a separate legal entity from the people who own and run it.

This separation is the defining feature.

It means that:

• The company can own assets in its own name

• The company can enter into contracts

• The company can sue and be sued

• The company is responsible for its own debts

The owners of the company are known as shareholders and the people who run it day to day are directors. In small businesses these are often the same people but legally the roles are distinct.

What limited liability really means

Limited liability refers to the fact that the financial responsibility of shareholders is limited.

In most cases this means:

• Shareholders are only liable up to the value of their shares

• Personal assets are protected if the company fails

• Losses and debts sit with the company not the individual

For example if you own shares worth £1 and the company cannot pay its debts your personal exposure is usually limited to that £1 provided you have acted properly as a director.

This protection is one of the main reasons people choose a limited company structure but it is not absolute. Directors still have legal duties and personal liability can arise in cases of fraud wrongful trading or unpaid personal guarantees.

The difference between private and public limited companies

A private limited company is different from a public limited company or PLC.

Key differences include:

• Private companies cannot offer shares to the general public

• Shares are usually held by a small number of people

• There is no requirement to have a minimum share capital

• Reporting requirements are generally lighter

Most UK businesses that incorporate choose the private limited company route because it offers flexibility without the complexity of a public listing.

How a private limited company is formed

A private limited company is formed by registering with Companies House.

This process includes:

• Choosing a company name

• Providing a registered office address

• Appointing at least one director

• Issuing shares to shareholders

• Preparing articles of association

Once registered the company legally exists and can start trading. From that point onwards it has ongoing legal and tax obligations regardless of how active it is.

The role of shareholders in a private limited company

Shareholders are the owners of the company.

Their main rights typically include:

• Receiving dividends when profits are distributed

• Voting on major decisions

• Appointing and removing directors

• Sharing in the value if the company is sold or closed

Shareholders do not usually run the business day to day unless they are also directors.

In small companies shareholders and directors are often the same person or family members which can blur the lines but legally the roles remain separate.

The role of directors in a private limited company

Directors are responsible for managing the company and ensuring it complies with the law.

Director duties include:

• Acting in the best interests of the company

• Keeping proper accounting records

• Filing accounts and confirmation statements

• Paying tax on time

• Avoiding conflicts of interest

Even if a company has only one director that individual still has the same legal responsibilities as a board of directors in a larger business.

How a private limited company is taxed

A private limited company is taxed separately from its owners.

The main taxes involved are:

• Corporation Tax on company profits

• VAT if registered

• PAYE and National Insurance if salaries are paid

Directors and shareholders are then taxed personally on money they take out of the company such as salary or dividends.

This separation between company tax and personal tax is a key difference from sole traders and partnerships.

Corporation Tax explained in simple terms

Corporation Tax is paid by the company on its taxable profits.

Taxable profits are broadly:

• Trading profits

• Investment income

• Chargeable gains

Allowable business expenses are deducted before calculating Corporation Tax. The rate can change over time and planning is important especially as profits grow.

Corporation Tax is paid by the company not the directors personally.

How owners get paid from a private limited company

Owners do not simply take money out of a limited company at will.

The main ways to extract money are:

• Salary through payroll

• Dividends from profits

• Pension contributions

• Repayment of director loans

Each method has different tax implications and rules. Taking money out incorrectly is one of the most common problems I see with new limited companies.

Accounting and reporting obligations

A private limited company has more reporting obligations than a sole trader.

These include:

• Preparing annual statutory accounts

• Filing accounts with Companies House

• Filing a Corporation Tax return with HMRC

• Submitting confirmation statements

• Keeping accounting records

Even dormant companies have filing obligations until they are formally closed.

Privacy and public information

Although called private a private limited company is not completely private.

Certain information is publicly available including:

• Company name and number

• Registered office address

• Director names

• Basic financial information

Small companies can file reduced accounts to limit the financial detail shown publicly but total privacy is not possible.

Advantages of a private limited liability company

There are many reasons why this structure is popular.

Common advantages include:

• Limited personal liability

• Tax planning opportunities

• Professional credibility

• Easier transfer of ownership

• Continuity beyond the owners

For growing businesses these advantages often outweigh the additional administrative burden.

Disadvantages and responsibilities

A private limited company is not suitable for everyone.

Potential disadvantages include:

• More paperwork and compliance

• Accounting costs

• Less privacy than sole trading

• Restrictions on taking money out

• Director responsibilities and risk

Understanding these downsides helps avoid disappointment later.

Private limited company versus sole trader

One of the most common comparisons is between a limited company and a sole trader.

Key differences include:

• Sole traders are personally liable for debts

• Limited companies have separate legal identity

• Tax is calculated differently

• Reporting obligations differ

There is no universally better option. The right choice depends on risk income and future plans.

When a private limited company makes sense

In my experience a private limited company is often suitable when:

• Profits are growing

• There is commercial risk

• The business wants to appear established

• There are plans to employ staff

• Long term growth or sale is a possibility

It is less suitable for very small low risk activities where simplicity is the priority.

Closing a private limited company

A private limited company does not stop existing just because it stops trading.

To close a company properly you must:

• Settle all liabilities

• Deal with company assets

• File final accounts and returns

• Apply for strike off or liquidation

Ignoring this process can lead to penalties even years later.

Common misunderstandings I see

There are a few recurring myths around private limited companies.

These include:

• Thinking company money is personal money

• Assuming limited liability means no responsibility

• Believing inactive companies do not need filings

• Thinking directors and shareholders are the same legally

Clearing up these misunderstandings early saves a lot of trouble.

How an accountant supports private limited companies

A good accountant does far more than submit accounts.

Support often includes:

• Structure and tax advice

• Director pay planning

• Compliance management

• Cash flow guidance

• Long term planning

For many owners the accountant becomes a key adviser rather than just a service provider.

Final thoughts

A private limited liability company is a powerful and flexible business structure when it is understood and used properly. It offers protection opportunities and credibility but it also brings responsibility and discipline.

In my experience business owners who take time to understand how a limited company really works make better decisions avoid common mistakes and build more resilient businesses. It is not the right choice for everyone but for many UK businesses it provides a strong foundation for growth and long term success.

You may also find our guidance on What is the difference between Corporation Tax and Income Tax and Can I take money out of my company tax free helpful when exploring related limited company questions. For a broader overview of running and managing a company, you can visit our limited company hub.